DOJ To Probe Apple’s Music Dominance

May 26, 2010

The U.S. Department of Justice is in the early stages of an investigation into how Apple runs its digital music business, according to several reports. While the probe is broad in scope, reportedly of particular interest to the Feds are alleged heavy handed tactics used against labels that participated in Amazon’s Daily Deal promotion, which Hypebot reported in early March.

In 2009, Amazon began asking labels to give it a 1 day exclusive and digital marketing support as part of the Daily Deal package. "When that happened iTunes said, enough of that shit," and began threatening to bury releases that had been featured on it competitor.

Once a beloved and scrappy upstart, the DOJ investigation is further confirmation that Apple’s image is shifting to that of corporate behemoth. According to NPD Group data, Apple is the dominant retailer of music downloads in the U.S. with 69% of the market and Amazon is second with just 8%. When physical product is factored in, Apples is still #1 with 26.7% of sales.

“Certainly if the Justice Department is getting involved, it raises the possibility of potential serious problems down the road for Apple,” Daniel L. Brown, an antitrust lawyer at Sheppard Mullin Richter & Hampton told the New York Times.

Inside Amazon’s Daily Deal

The Daily Deal has been, for all practical purposes, a free promotion subsidized by Amazon. If accepted into the program, artists and labels are asked for a one day exclusive. During that 24 hours Amazon aggressively discounts the title to between $1.99 and $3.99. In part, to keep each sale eligible to be counted on the major charts, Amazon actually reimburses the labels at the normal wholesale price. In effect, subsidizing about $3 of each purchase. Amazon MP3 also features the title on its web pages and to the 1.4 million that follow the Daily Deal on Twitter.

Unlike the old price and positioning charges at brick and mortar retail, Amazon and most other online retailers do not charge labels for these promotions. In the case of the Daily Deal, artists and labels are only asked to promote the release via their web sites, email lists and social networks.

Some label executives worried that deep discounts cannibalized early sales that would have happened at full price. But one major label group recently told its labels that its own studies had shown that as much as 95% of all Daily Deal sales were incremental and would never have happened without the discount.

Apple Fought Back

Steve Jobs has often attempted to position himself as a champion of music and Apple as music’s savior. But not this time.

Starting early last year, Jobs & Co. reportedly made it clear to almost every major and indie record label that participation in Amazon’s Daily Deal would cost then dearly at iTunes. Afraid of Apple’s power, most labels capitulated.